In December 2019 Parliament passed the Budget Law for 2020 and a related tax law decree. Most of the new provisions apply from 1 January 2020 or will become applicable in 2020. For example, as of 2020, the tax on financial instruments held abroad and on foreign real estate also apply to non-commercial entities (including trusts and foundations) and certain Italian tax-resident partnerships. This article summarises the main changes applicable to corporate entities.
The recently passed Growth Decree has introduced a number of tax provisions which apply to various sectors. In particular, the decree-law has extended the super depreciation regime to investments in new tangible assets in certain circumstances, introduced a corporate income tax reduction on reinvested earnings and restored tax incentives for business combinations, allowing companies involved in mergers, demergers or business combinations to get a free tax step-up in the book value of relevant assets up to €5 million.
The government recently transcribed the EU Anti-tax Avoidance Directive into Italian law. The decree's new controlled foreign corporation (CFC) rules are applicable from the fiscal year following that in progress on 31 December 2018 (ie, from 2019 for calendar-year taxpayers). The rules introduced by the decree have removed the distinction between a tax haven CFC and a white list CFC.
Italy's value added tax (VAT) group scheme recently took effect. The scope of application, conditions and implications of the VAT group scheme are different from the existing VAT consolidation scheme. Contrary to the VAT consolidation scheme, where each entity remains not only independent from a juridical point of view, but also a single taxable person, a VAT group is considered a single VAT taxpayer and the participating entities are jointly and severally liable for VAT (and interest and penalties) to the tax authorities.
The Tax Administration can now introduce unilateral corresponding downward adjustments to eliminate double taxation where a foreign tax authority makes a primary adjustment as a result of applying the arm's-length principle to transactions involving associated enterprises in a different tax jurisdiction. This new administrative procedure aims to accelerate the resolution of double taxation deriving from transfer pricing adjustments under mutual agreement procedures.
The new principles introduced by Actions 8 to 10 of the Base Erosion and Profit Shifting project have been reflected in Italy through Decree-Law 50/2017's amendments to Article 110(7) of the Income Tax Code. The new article includes a specific reference to the arm's-length principle and provides for implementing provisions to be issued by the Ministry of Finance to align with international best practices.
The Budget Law 2018 introduced, among other things, amendments to the tax regime concerning dividends from non-resident companies located in low-tax jurisdictions (ie, blacklisted companies). 'Blacklisted companies' are entities resident or located in jurisdictions other than EU or European Economic Area member states, whose ordinary or special tax regime grants a nominal tax rate that is 50% lower than the Italian one.
The recently approved Budget Law has harmonised the taxation of dividends and capital gains earned by non-business individuals on substantial and non-substantial participation held in Italian and foreign companies, among other things. Companies and partnerships will be unaffected by these changes, as the distinction between substantial and non-substantial participation is irrelevant.
The notional interest deduction (NID) regime has been in effect since the 2011 fiscal year. Under this regime, Italian resident companies and permanent establishments of non-resident companies may deduct notional interest from their corporate income taxable base. The NID is calculated according to the equity increase (ie, new equity rate) from the end of the 2010 fiscal year, multiplied by a rate determined annually.
Articles 1(145) and (146) of Law 208/2015 provide that the parent company of a multinational group resident in Italy must file a country-by-country report with the tax authorities within the specified time limit. The secondary legislation enacted by the Ministry of Finance's February 2017 decree-law provides further details on country-by-country reporting requirements and application rules, considering Organisation for Economic Cooperation and Development recommendations and EU Directive 2016/881/EU.
The Budget Law 2017 has introduced an innovative tax regime based on a substitute flat tax reserved for new eligible individuals who transfer their tax residency to Italy. The new tax regime is based on the non-domiciled resident approach already adopted in the United Kingdom and other EU countries and aims to attract high-net-worth individuals and their relatives to Italy and increase foreign investment.
The Tax Authority recently issued Circular Letter 35/E, which clarifies Italy's controlled foreign companies (CFC) regime in light of recent changes under Budget Laws 190/2014 and 208/2015 and Decree-Law 147/2015. The black-list criteria provided for CFC purposes have been significantly revised and, if a CFC is deemed to exist, material clarifications have been provided with regard to the taxation of dividends paid which are – in principle – fully taxable in the hands of the Italian receiving company.
The Tax Authority recently issued a circular that provides general guidelines regarding leveraged buy-out transactions and similar acquisition structures, with particular reference to investments made by private equity funds. The guidelines cover interest expenses, fees charged by private equity firms, withholding tax on interest, shareholder loans and exit disposals.
The government introduced a 'Patent Box' tax regime for the first time in 2014. The provision applies to corporate income tax and regional tax on productive activities and aims to provide a tax incentive to create, relocate and maintain intangible assets in Italy through the introduction of a tax regime based on the Organisation for Economic Cooperation and Development's 'nexus' approach.
The Council of Ministers recently approved the implementation of three tax reform decrees. The third decree aims to create a favourable environment for foreign investors and Italian enterprises that want to grow their international business. Accordingly, the changes aim to simplify the existing rules based on international compliance standards.
As part of the Base Erosion and Profit Shifting project, the Organisation for Economic Cooperation and Development (OECD) recently issued a discussion draft on the use of profit split methods in relation to transfer pricing in the context of global value chains. This update provides an overview of the discussion draft and gives recommendations on what further guidance is needed from the OECD.
The government recently approved Decree-Law 66/2014, which introduced changes to the taxation of some types of financial income (ie, interest on loans, notes, capital gains and dividend incomes) effective as of July 1 2014, increasing the tax rate from 20% to 26%.
Parliament recently approved the Stability Law 2014. The law contains a number of significant measures affecting individual and corporate taxpayers, including an increase in notional interest rate deductions, introduction of the option for companies to step up the tax cost of business assets and new provisions on the deductibility of payments made under finance lease agreements.
The Italian Revenue Agency recently approved new and revised forms to be used to claim for reimbursement of or exemption from Italian withholding taxes applicable to certain income of non-Italian residents. The agency also approved a standard certificate of tax residence to be filed by Italian residents with foreign tax authorities in order to obtain reimbursement of or exemption from foreign taxes.
Under the Income Tax Code, any capital gain derived by an Italian-resident company is 95% exempt from corporate income tax. Since the participation exemption regime was introduced, the tax authorities have often been asked to consider specific cases involving the residence and the business activity requirements. As a result, Circular Letter 7/E was recently issued to clarify such issues further.
Parliament recently approved the so-called 'Stability Law' for 2013. The law includes a number of significant measures affecting individual and corporate taxpayers. New provisions include an increase in value added tax, the reintroduction of an elective regime providing for a step-up in the tax basis for participation in unlisted 'revaluation' companies and the introduction of a financial transaction tax.
Law Decree 138/2011, which was later converted to Law 148/2011, introduced new anti-abuse provisions for companies consecutively incurring tax losses and widened the application of provisions concerning non-operating companies that are required to disclose for tax purposes a minimum income determined on the basis of their assets, notwithstanding the actual result of the application of ordinary tax provisions.
In order to encourage corporate self-financing, the government has introduced the allowance for corporate equity, which enables companies to deduct an amount equal to the notional return on invested capital from their taxable income for income tax and corporation tax purposes. Further deductions are available for regional tax on production as an incentive to employers.
Parliament recently approved an austerity package that aims to present a balanced budget for 2012. Its various provisions - with an estimated financial impact of €54 billion - include a number of significant measures for individual and corporate taxpayers. In particular, companies should be aware of new provisions on carry-forward rules, criminal penalties and dormant companies.
Since 2010 Italy's controlled foreign company rules have applied to foreign subsidiaries that are established in whitelisted jurisdictions. The tax authorities have recently issued a circular which provides new guidelines on the application of the controlled foreign company rules to foreign companies in jurisdictions that are not tax havens.
A circular from the tax authorities provides further details on the Italian tax treatment of trusts. It focuses on when an instrument will be considered a 'sham' trust and must be disregarded for income tax purposes. However, many tax experts have criticised the circular for its basis in a misleading interpretation of trust taxation rules and its disregard for general principles of Italian income tax law.
Measures introduced by Finance Bills 2005, 2006 and 2007 require financial operators to facilitate the tax authorities' monitoring of taxpayers by filing an electronic notification with the authorities detailing all business links with their clients - such as bank accounts, loans and deposits - established since January 1 2005, even if such links no longer exist.
The tax authorities have recently revised their position on the early repayment of medium and long-term loans, returning to the position held before 2006. Ordinary transfer taxes are not levied on bank loans with a term of over 18 months and a more favourable substitute tax at 0.25% of the loan applies, regardless of whether the borrower has the right to repay the loan before the end of the 18-month period.
Since the introduction of provisions to the Income Tax Code aimed at regulating the taxation of trusts and related beneficiaries, the tax treatment applicable to income distribution from foreign opaque trusts has not been clarified by law. A new decree law has filled this legal void by providing for a new class of 'financial income', represented by income paid to Italian resident beneficiaries by non-EU trusts established in low-tax jurisdictions.